As part of the Government’s efforts to bring some balance to the housing market and to assist with increasing the number of houses available for sale, and thereby making it easier for first home buyers to enter the market, they have targeted the residential investment property owner and property speculators with two major changes:
Extending the bright-line test
This was originally introduced on property transactions, aside from the family home to tax profits gained after two years, if sold. It was then extended to five years and now has been moved further out to 10 years. This means that if you purchase an investment property and sell it within 10 years, you will have to pay income tax on the profits
For tax purposes a property’s purchase date is the date a binding sale and purchase agreement is entered into (even if some conditions still need to be met). As from 27 March a property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021, if the purchase was the result of an offer the purchaser made on or before 23 March 2021 that cannot be withdrawn before 27 March 2021.
The bright-line test does not apply to your main family home i.e where you live.
Interest cost deductions
The second major change is closing off the ability for property investors and property speculators to write off interest costs against income that they derive from their investment properties. Up until now, interest on loans has been able to be claimed. The rules have been changed and the details are to come.
The change will apply from 1 October 2021. Interest deductions on residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October 2021. Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense. However, the amount you can claim will be reduced over the next 4 income years until it is completely phased out. This means that in the 2025–26 and later income years, you will not be able to claim any interest expense as deductions against your income. If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property acquired on or after 27 March 2021. Interest on it will not be able to be claimed as an expense from 1 October 2021.
Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.
There will be more information on this with relation to new builds and the situation where tax is paid under the bright-line test so we await those details.
Alongside these changes and apart from tax issues, the government is also:
Lifting the income caps on First Home Loans and First Home Grants.
Extending the Apprenticeship Boost payment until August 2022 to help employers keep and take on new apprentices.
Giving an incentive to investment in new developments, rather than existing housing stock. If you invest in a new build property, you will be exempt from changes to the bright-line test and interest deductibility policy as mentioned above.
Launching a $3.8 billion Housing Acceleration Fund, which will speed up the pace and scale of house building.
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IRD Factsheet interest deductions March 2021